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The consolidation of MRV (MRVC) & Fiberxon is a healthy force for the industry but one made at the near term expense of shareholders (see MRV, Luminent, and Fiberxon). The rest of the optical component industry will see the benefits of consolidation, but MRV shareholders have lost nearly 30% of their investment since the merger was approved.

MRV has much in common with Vitesse Semiconductor (VTSS.pk), a company currently targeted by the activist fund ChapCap partners.

A business that appears fundamentally undervalued in a sector ripe for consolidation.

Debt holdings with default covenants triggered by a lack of financial compliance

Executive departures

Large cash expenses associated with audit compliance

Questionable decisions and actions made by board members

Board members that appear to lack independence. Four of the officers and directors are related through family connections.

Shareholder lawsuits (not yet with MRVC, but I would expect them to be imminent if the company is de-listed)

Like Vitesse, MRV is an ideal activist target. The problem may be that the company is de-listed, and enters the same domain as Vitesse, where no annual meetings are held and therefore no directors can be replaced by proxy.

Author owns no position in MRV, and an immaterial short position in Vitesse Semiconductor.

Update: It appears that there is a small but vitrolic contingent of people who are very upset with my opinions of MRV. I am open for honest and objective debate, but it would appear others are not.

Discussion

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I will tell you why I think your analysis is very misleading:

1. VTSS’s OWN financials had to be reconstructed. MRVC’s financial
are fine, and this company went through the tech meltdown without a
shareholder suit. MRVC will get Fiberxon’s statements sorted out soon and the problem will be over. VTSS has spent YEARS trying to sort out their numbers and failed to do so. So you are totally off here.

2. VTSS got delisted because of their problems with their OWN
financials. The NASDAQ will view Fiberxon differently as MRVC is
making a good faith effort to fix the problem with Fiberxon and their own financials were not in question.

3. VTSS’s managment was guilty of stock option backdating. This was another factor in their delisting. MRVC’s management has no such problems.

4. VTSS’s management departures were due to stock option backdating potential crimes. MRVC’s management departures appear to be due to better job offers, and maybe a desire to get a heavy hitter CFO in to resolve Fiberxon. So you comparison on this issue is invalid.

5. For you to imply that MRVC will be delisted (and its directors
protected from proxy contests) is not appropriate given the fact set above. It gives the appearance that you are bashing MRVC and trying to create a panic selloff in the shares.

Andrew, quite honestly, the material you put on your link is
misleading enough to give the appearance that you are a basher working for the shorts. The superficial and ultimately false comparisons you are making are the work of a basher, not an analyst.

I am not attempting to mislead anyone so if that is how this is perceived I apologize.

1. MRVC and Fiberxon are now the same entity, they are one and the same. If financials cannot be filed because a material portion of the company is unknown, I don’t believe it is any different than lacking all financials when it comes to a compliance perspective.

2. This is debatable. I think it is just as wrong to say they will not be delisted as it is to say they definitely will be delisted. No one knows what the the committee will decide ahead of time. They may decide that the company invited this on themselves and make an example out of them. No one really knows.

3. Most companies that engaged in stock option backdating and as a result could not file were not delisted. There is precedent in previous decisions that failure to file due to backdating is not cause for delisting.

4. You are interpreting the data in a different way. Why did they decide to take new jobs immediately after closing a controversial acquisition? Why didn’t they finish the job?

5. I am simply expressing a personal opinion. I am implying, just as MRVC has announced, that they could be delisted.

It may be nitpicking, but I think your point that “Board members that appear to lack independence. Four of the officers and directors are related through family connections” is a bit of a stretch. Of course, Shlomo Margalit, the Board Chairman, and Near Margalit, the head of Luminent, are father and son. But, I assume that the other related officers and directors you are referring to are Noam Lotan, CEO and Harold Furchtgott-Roth, board member. The latter is related to Lotan by the fact that he is a cousin of Lotan’s wife. Given that Furchtgott-Roth brings his experience as a former commissioner of the Federal Communications Commission and as a PhD economist to his role on the board, I wouldn’t consider his position to be one lacking independence. And, the company has certified in its latest schedule 14a definitive proxy statement that he is “…independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934.”

Neither Lotan nor Margalit sit on any of the audit, compensation, nor nomination and governence committees.

Are there other officers and directors related through family connections I’m not aware of?

Concerning delisting, that is possible, but I don’t think likely unless the audit is not completed within 6 to 9 months, given the experience of Dell, Finisar, Novell and many other NASDAQ listed companies recently. Of course, it’s never good to be delinquent in filings, because shareholders have less information to make an informed judgement.

After reading the S-1 it seems MRVC is tired of diluting its own stock so now it will raise cash via a subsidiary offering while retaining much control. Different stock classes, staggered board elections, entangled ownership…what a deal…not!

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